Creditor insurance vs. disability insurance in Canada – What’s the difference?

With files from Rubina Ahmed-Haq

This article was originally posted on November 24, 2022 and was updated on February 6, 2026.

If you’ve ever taken out a mortgage, car loan, or line of credit in Canada, you may have come across one final question before wrapping up: Do you want creditor insurance? 

It’s easy to say yes just to get it over with (or to say no and move on). But understanding what this coverage actually does, and how it compares to a similar type of protection, disability insurance, can help ensure you’re making the right financial decision for your personal needs.

While both types of coverage offer financial protection, they work in very different ways. And in 2026’s economic landscape, knowing the difference matters more than ever. Let’s dive in.

What is creditor insurance? How does it work?

Creditor insurance (also known as credit insurance) is a type of coverage that protects a specific loan or credit product. When you take out a mortgage, car loan, personal loan (or even borrow funds through a credit card), the lender may offer the option of adding creditor insurance. 

And here’s how it works: If something happens to you – say, disability, critical illness, job loss, or death – creditor insurance can step in to cover your loan payments. That way, it won’t get passed on to your loved ones. 

Depending on the plan and the type of claim, benefits may be paid monthly or as a lump sum (to pay off the entire loan balance). Lump-sum payouts are more commonly used in the event of critical illness or death.

Types of creditor insurance in Canada

According to the Government of Canada, this coverage may be referred to as credit insurance, loan insurance, creditor insurance, balance protection insurance, balance insurance, or debt insurance.

But generally speaking, any loan can be equipped with a respective type of creditor insurance. This includes a mortgage, car loan, line of credit, and credit card. 

What is disability insurance? How does it work?

Disability insurance is fundamentally different from creditor insurance. Instead of covering a specific debt, it replaces a portion of your income if you become sick or injured and can no longer work. 

Think of disability insurance as a paycheque replacement plan. If you’re no longer able to work due to a covered claim (such as a workplace injury, serious accident, chronic illness, or mental health condition), your plan provides a monthly benefit. This benefit is typically set at 60% to 85% of your pre-disability income, helping you pay for everyday expenses while you recover.

Types of disability insurance in Canada

There are two main types of disability insurance: short-term disability and long-term disability coverage. And the differences are simply implied by their name:

Short-term disability insurance: This provides coverage for temporary disabilities, typically ranging from a few weeks to six months. It can help bridge the gap between when you first become disabled and when your long-term coverage kicks in (if you have it).

Long-term disability insurance: This provides benefits for extended disabilities and kicks in after your short-term coverage ends. Depending on the policy, it may last for several years, for a lifetime, or until you’re eventually able to return to work. 

Also read: The short-term disability cover maternity leave?

You may also have disability coverage under your group insurance policy as part of your employer’s benefits package. However, the coverage is usually quite limited, and in most cases, if you leave your job for whatever reason, you’ll also lose the insurance. 

What’s the difference between creditor insurance and disability insurance?

The main difference between creditor insurance and disability insurance comes down to who the coverage is designed to protect, and how the benefits are paid. Here’s a quick side-by-side comparison of the two:

The main caveat is this: creditor insurance pays the lender directly; it doesn’t put cash in your pocket. If you become disabled and can’t work, creditor insurance may cover your monthly mortgage or loan payment for a set period, but it won’t help with other living expenses like rent, groceries, utilities, or childcare.

On the other hand, with disability insurance, benefits are paid directly to you, not to a lender. That means you can use the money however you need: whether that’s covering loans like mortgage or car payments, or paying rent, groceries, and all the day-to-day costs. 

That said, creditor insurance typically offers protection beyond disability alone. These plans tend to include coverage for events like critical illness or death (on top of disability). In the event of death, outstanding debts could otherwise be passed on to your loved ones, and creditor insurance can help pay those off. 

 

What about creditor insurance vs. life insurance?

This is a common point of confusion, so let's clarify. Creditor insurance often includes a life insurance component, in that it pays off your loan if you die. For example, mortgage creditor insurance will pay off your mortgage balance upon death, ensuring your family isn't stuck paying off a home they can’t afford.

But if your main concern is protecting your loved ones financially in the event of your death, you may want to consider traditional life insurance instead, especially a term life policy. Here’s why:

1. Your beneficiaries choose how to use the money: Term life insurance pays the full death benefit to your beneficiaries, who can use it to cover the mortgage, or anything else if they deem necessary. It won’t go directly to the lender.
2. The coverage stays the same: The payout doesn’t decrease over time. A $500,000 policy pays $500,000 whether it’s year one or year twenty, unlike creditor insurance, which drops as your balance falls.
3. A (potentially) better value: In many cases, term life insurance is less expensive than creditor insurance when comparing equivalent coverage. Because it requires medical underwriting, healthy individuals get better rates. Compare term life quotes to see for yourself. 
4. It’s more portable: Life insurance stays with you even if you pay off your debt early, refinance, or switch lenders. Creditor insurance is tied to the specific loan and ends if you pay off the debt.

Creditor vs. disability insurance: Which one is right for me?

The choice between creditor insurance and disability insurance depends on your financial situation, health, and what you're trying to protect.

Creditor insurance may be right for you if:

• You’re primarily concerned about protecting a specific debt, like a mortgage or car loan
• You want simple, automatic coverage added at the time you take out a loan
• You don’t qualify for traditional insurance due to health or underwriting concerns
• Your main goal is to ensure a big debt isn’t passed on to loved ones if you can’t pay

Disability insurance may be right for you if:

• You rely on your income to cover day-to-day living expenses
• You want flexibility in how benefits are used (rent, groceries, childcare, health costs, etc.)
• You’re self-employed, or don’t have strong workplace disability coverage
• You want coverage that follows you, even if you change jobs or lenders

 

Can I get both creditor insurance and disability insurance?

Yes, absolutely. Some Canadians choose a layered approach – carrying creditor insurance on big loans (such as a mortgage) for peace of mind, while also holding a separate disability policy for broader income protection. And in many cases, Canadians who already have disability coverage through workplace benefits may still opt for creditor insurance to help protect specific debts.

The layered policy approach might make sense if you want the convenience of creditor insurance for your largest debt while ensuring more comprehensive protection in the event of disability. Just be mindful of the total cost and review your coverage regularly to avoid paying for redundant protection.

Where can I buy creditor insurance in Canada?

Creditor insurance is almost always sold directly by the lender at the time you're taking out a loan or credit product. In Canada, you'll encounter creditor insurance offers from:

• Major banks: TD, RBC, Scotiabank, BMO, CIBC, and National Bank all offer creditor insurance on mortgages, loans, lines of credit, and credit cards.
• Credit unions: Most credit unions across Canada provide creditor insurance options for their lending products.
• Auto dealerships and finance companies: When financing a vehicle, you'll typically be offered payment protection or loan insurance.
• Credit card issuers: Both bank-issued and third-party credit cards may offer balance protection insurance.

Signing up for creditor insurance is straightforward, often just checking a box on your loan application for instant approval. However, this simplicity comes with limitations. You can't shop around or compare offerings from different insurers. You're limited to the creditor insurance product offered by your specific lender, and the terms are generally non-negotiable.

Where can I buy disability insurance in Canada?

Disability insurance offers more purchasing options than creditor insurance, which means you can shop around for the best coverage and price. Here are some buying methods in Canada:

Insurance brokers: Working with a broker is generally ideal. Brokers represent multiple insurance companies and can compare policies from different insurers to find the best fit for your needs, occupation, and budget. They can also help you navigate the underwriting process and customize your coverage.

Insurance agents: Agents work for a specific insurance company (like Manulife, Canada Life, or Sun Life) and can provide detailed information about that company's products. While you won't get cross-company comparisons, agents often have deep expertise in their company's offerings.

Online platforms: Websites like Ratehub.ca allow you to compare insurance quotes from leading Canadian insurers, making it easy to see your options and coverage levels side by side. You can start an application online and complete it with the help of a licensed, and trusted advisor.Direct from insurance companies: Some insurers allow you to purchase disability insurance directly through their websites or by phone. However, you'll miss out on the ability to compare multiple companies' offerings.

The bottom line

Ultimately, choosing between creditor insurance and disability insurance depends on your personal financial needs and what you want to protect. 

Creditor insurance can offer convenient, automatic coverage for specific debts like a mortgage or car loan, ensuring those balances won’t fall on your loved ones. Disability insurance, on the other hand, provides broader income protection, giving you flexibility to cover everyday expenses if you can’t work due to illness or injury. 

Before committing, it’s important to review the terms, understand what’s covered, and compare your options to make sure the coverage you choose aligns with your needs.

Also read:

• How does the cash value of life insurance work?
• All about life insurance for children in Canada
• Ratehub.ca’s insurance predictions for 2026
• Personal loan vs. line of credit – Which is right for you?